PWI PrimeWest Energy

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PWI PrimeWest Energy
Ramu Nachiappan 10/18/2004

• Alberta, Canada
• Oil and Natural Gas trust

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Overview

• PrimeWest Energy Trust invests and operates
  proven oil and natural gas reserves in Western
  Canada
• Provide Stockholders a large distribution monthly
• Play on natural gas prices

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What are trusts?

• Provide a means for small investors in be
  invested in assets which are too large and
  illiquid to purchase alone
• Typically provide large monthly distributions
  (return on capital return of capital)
• The management of the company takes a small
  management fee as compensation. Approximately 2
  in 2002.

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What are trusts?

• Income trusts are an interesting fixed income
  investment vehicle
• Investors get a large part of the revenue from
  resources owned by the company
• Types of Trusts
• Oil Natural Gas
• Coal
• Lumber / Pulp
• Real Estate R.E.I.s

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Natural Gas

• A lot of fixed or inelastic demand will not
  change significantly due to prices
• Many Natural Gas fired electric plants built in
  past decade
• Increased Residential use heating
• 20 million new homes built with natural gas
  heating systems
• Hydrogen, for fuel cells will likely be extracted
  from natural gas initially, should the hydrogen
  economy ever materialize

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Tends in Natural Gas Demand

• Natural Gas required to extract usable oil from
  oil sands. Now with high oil prices, oil sands
  production is now quite profitable. This will
  place increasing pressure on Natural Gas supplies
• Tight Gas Supplies Threaten Alberta's Oil-Sands
  Projects, Wall Street Journal September 28, 2004
• Predicts that as much as 15 of Canadian Natural
  Gas Production may be used by growing oil-sands
  production

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Environment

• Natural Gas is the cleanest fossil fuel
• Burns cleaner less SO2, NOX, soot etc.
• Less CO2 emissions for same energy production-
  may become more relevant with the recent
  implementation of Kyoto

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Natural Gas

• Unlike Oil, Natural Gas cannot be imported easily
• Must be liquefied to transport efficiently
  termed Liquefied Natural Gas (LNG)
• Requires LNG terminals on both ends
• Gas ? Liquid
• Liquid ? Gas

• Only 4 terminals in the US
• Proposals for 46 more
• Only 8 have received final regulatory approval
  so far
• Only 1 will come online by 2008

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Company Profile

• Operations are in Alberta, in the Western
  Canadian Sedimentary Basin
• Market Capitalization - 1.24 billion dollars
• Most of their oil fields produce light oil, which
  is easier to refine

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Company Profile

• It is not involved in risky business of
  oil/natural gas exploration
• Purchases mature fields from other Companies with
  low depreciation rates
• 68 Natural Gas weighted
• Remainder is mostly oil and other byproducts
• Distribute about 80 90 of profits to
  unitholders
• Remainder is used to make new acquisitions

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Why Canadian?

• Canadian Trusts are active trusts
• Make new acquisitions to replace declining
  reserves
• Acquisitions funded either through bonds or new
  issues of the stock
• US based trusts are passive trusts
• They do not make new purchases
• When resource pool runs out, the remaining
  assests of the trust are liquidated and proceeds
  are returned to unitholders

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Acquisitions
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Acquisitions

• Purchased all of Calpines Canadian Natural Gas
  and oil assets for 625 million in early
  September
• Calpine, an electric power company sold these
  assets in order to pay down debt.
• Funded by issuing debentures unsecured bonds

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Operations

• Operates 80 of its properties
• Actively acquires, develops, produces and sells
  Natural Gas and Petroleum to generate monthly
  cash distributions
• Not involved with the risky business of
  exploration
• Purchases mature fields from other companies and
  then manages them

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Dividends

• Dividend Yield Yearly Dividend/Stock Price
• Currently just above 13
• Given Monthly
• Next Dividend November 15
• Ex-dividend Date October 20
• Stock Price Typically Decreases after Ex-dividend
  date
• DRIP dividend reinvestment plan shares of a
  company can be purchased directly from the
  company and the dividends used to purchase more
  each month. Advantageous to small investors.

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Financials
SALES REVENUE
(1) Includes sulphur. (2) Net of amortized
premiums.
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Competitors

• All Canadian Trusts I like them all
• Penngrowth Energy Trust (PGH)
• Provident Energy Trust (PVX)
• PWI looks most attractive due to its recent
  acquisitions and it focus on Natural Gas

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Natural Gas
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Crude Oil Prices
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Natural Gas Price
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PrimeWest Stock Price 1 year
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PrimeWest 3 months
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PrimeWest vs. NYMEX Oil Price
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Hedging

• Management emphasizes their conservative
  financial strategy
• Hedges commodity prices using derivative
  instruments
• Hedges limit the effect of price swings in
  commodity prices
• Try to minimize the cost of extraction

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Risks/Negatives

• Price of Natural Gas may decrease - unlikely
• Price of Oil may decrease likely in the short
  term at least
• Today oil prices hit a new record high above 55
  a barrel there have been many record highs in the
  past few weeks
• Oil closed at 53.70 today, backing off a little
• The reserves have been overestimated
• Being a Canadian company, there is a 15 tax on
  dividends

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Portfolio Considerations

• Helps diversify/balance tech-heavy portfolio
• Provides a relatively stable source of income
• Club members develop a better understanding of
  the way trusts work
• Commodities more resistant to the effect of a
  slow economy